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Benson's Economic & Market Trends                               

Oil, the Dollar, and US Prosperity

August 8, 2003  

Like many Americans, I greatly enjoy air conditioning in the summer, heat in the winter, and gas for my sport utility vehicle.  I also happen to enjoy traveling to those civilized lands that take modern conveniences for granted -   such prosperity takes a lot of energy. 

In the United States, we stopped being energy independent many years ago.  The rest of the world, including Europe and Asia, also come up empty in the energy department.  Russia has enough oil to export for a few years until their economy develops; Japan has zilch, and China and India can never, on their own, meet the need for oil to accommodate over 2 billion drivers. 

If you take the time to examine a simple map of where the Oil Reserves are in the world, you'll notice that two-thirds of the reserves sit in the Middle East, with a massive concentration in Iraq, Kuwait, and Saudi Arabia.

The Dollar has grown to be the world currency for settling debts, and, with around 75% of foreign central banks holding their currency in reserves, the Dollar is still the World Reserve Currency.  Only recently has the Euro come into existence as a possible viable alternative as a financial asset, that can be used to settle accounts, and store value.

The level of prosperity in the United States has, in no small measure, been helped by the fact that we have run massive deficits with the rest of the world. The US has been able to run up over $3 Trillion in debts to purchase goods and services from abroad that have yet to be paid for really.  The world has been willing to accept dollar assets as investments and Asia remains delighted to have their Central banks buy Treasury and Agency securities because the United States is sending Asia our manufacturing jobs.  However, at some point, the day will come when foreign dollar asset holders will want to spend their dollar reserves on something of value.  There is only one thing that has universal value to all modern economies " OIL!

In the real world (which is a long way from Hollywood and the Liberal Media), the one factor underpinning American prosperity is keeping the dollar the World Reserve Currency.  This can only be done if the oil producing states keep oil priced in dollars, and all their currency reserves in dollar assets.  If anything put the final nail in Saddam Hussein's coffin, it was his move to start selling oil for Euros. 

The US is the sole super power and we control and dictate to the Middle East oil producers.   America has the power to change rulers if they can't follow the  "straight line" the US dictates.  America's prosperity depends on this.  Moreover, Europe wants to be warm in the winter and we don't want to go down a road that leads to conflict with Asia over oil.  It remains in our interest, as well as the rest of the world's, that the US insures that oil is available to all, at a reasonable price. 

Removing a bloody tyrant in Iraq is certainly better for the world than seeing what might happen in Japan and China if they started freezing in the winter.  Real wars are fought over oil. Germany invaded Russia for the oil in the Caucasus.

Japan bombed Pearl Harbor because the US cut off their oil.  Those were real wars because the national interest, and the right to survive, were at stake (the Vietnam War was a disaster because there was no real national interest served by slaughtering peasants and American troops).  The war in Iraq is a sideshow by comparison but it offers huge national interest.

At  present, we notice that many US citizens are exercising their "freedom of screech" to politicize the fact that the current President miss-stated the case for immediate war with Iraq.  Perhaps the President should be praised for "doing what was right" for America's interests, even though the Administration could be faulted for the "way it was done".  I, for one, would not want to bring back an Arab oil embargo and long lines at the gas pump.

Governments have secrets.  If politicians always told the truth, there wouldn't be any secrets. So, if governments are to keep secrets, how can you fault a politician for not telling the whole truth?  We would assert that the President failed to present the real case for Iraq, which is:  1) prosperity for America based on controlling Middle East oil, and on maintaining the Dollar as the World Reserve Currency, and 2) peace and stability, which the guaranteed access to oil brings to the world.

We believe that the US Treasury deficit, and the US Trade deficits, are massive stock and credit bubbles, courtesy of the Federal Reserve.  These deficits will cause significant disruption to the value of the Dollar and to US prosperity, all on their own.  We do not need to give up de facto control over Middle East Oil, which in turn underpins the Dollar as the World Reserve Currency.  Such action, which may be welcomed by the Liberal Media, would quickly end America's role as an economic super power and lead to the sudden and permanent demise of our prosperity. 

If foreign central banks could no longer believe that holding Dollars guarantees access to oil, there would be no real reason to hold Dollars.  With the US running deficits of 5% for budget and trade, in the real world the Dollar would collapse, along with our bond market, stock market, real estate market, and economic way of life. 

We believe, like George Soros believes, that the dollar will weaken on fundamental grounds.  Unlike Mr. Soros, we do not wish to see a catastrophic "dollar crash" (his motives should be questioned after having made $1 Billion after having helped crash the Pound).   If the dollar cratered, even a "limousine liberal" could only afford a Kia.